K-Swiss (NASDAQ:KSWS) is a Los Angeles-based manufacturer of athletic and casual footwear, apparel, and accessories. Operating through two brands, K-Swiss and Palladium, K-Swiss makes most of its money by selling its products at wholesale rates to large retailers, pro shops, and specialty stores; however, it also sells directly to the consumer through its website. With 2009 revenues of $241 million, K-Swiss is much smaller than major competitors Nike (NKE) and Adidas AG (ADDYY).
Over the past four years, K-Swiss's revenues have fallen by nearly half from its peak of $508.6 million. Part of this is is the result of slowing growth in the U.S. footwear market and stiff competition from Nike and Adidas, which held a combined 57% share of the global market for athletic footwear. Additionally, the global economic slowdown has decreased the global demand for shoes, hurting the company's sales. In 2009, the company's net sales fell by 25%.
K-Swiss manufactures 78% of its footwear in China, 21% in Thailand, and 1% in Taiwan. It generates revenues by selling this footwear, along with a limited line of apparel and accessories, to different types of retailers. Over the past several years, K-Swiss has become an increasingly international company. In 2009 international sales accounted for half of the company's revenue.
Like some other footwear companies, K-Swiss works closely with shoe retailers like Foot Locker (FL). However, no single retailer accounts for more than 10% of the company's sales, giving some protection against consumer risk.
The company groups its products into three main types:
The K-Swiss brand is the profit driver for this company, generating nearly a quarter of the company's revenue. The brand's signature shoe is the K-Swiss Classic, a casual shoe that has had the same basic design since 1966. The brand also competes in the tennis, training, and children's shoes markets. The company also makes footwear under the Palladium brand, which consists of all-terrain footwear. In 2009, the Palladium brand generated 9.8% of the company's revenue.http://www.wikinvest.com/wikinvest/images/buttons/hide.gif
While K-Swiss's international sales have grown over the past few years, its domestic sales have declined. From 2008 to 2009, domestic sales fell 27%. This can partly be attributed to the maturity of the U.S. footwear industry. Growth of industry sales was at 5% roughly five years ago, but at the turn of the decade growth was hovering near 2%. At the same time, the top three players in the industry (Nike, adidas, and Puma) hold nearly 65% of U.S. market share. Given the maturing footwear market in the U.S. and the superior financial strength of some of the company's competitors, rebuilding domestic sales will be a difficult task. If it is not successful, K-Swiss can choose to refocus its efforts on continuing growth of international sales rather than reclaiming lost market share in the U.S. market -- international sales comprise of 50% of the company's revenue.
Many footwear companies allow their buyers to place orders in advance, and backlogs are any orders set to ship within 6 months. This system allows investors to take a slight peek into the future in terms of the company's sales. For K-Swiss, backlog at the end of 2009 was $80.9 million, a 12.6% decrease from the $92.6 million backlog at the end of 2006. The reason behind the fall was a 6.6% decrease in domestic backlog. Note that backlogs are not always indicative of future sales since buyers can cancel orders at any time without financial penalty.
The economic downturn spells trouble for shoemakers like K-Swiss. Shoes for the most part are discretionary items that consumers can put off buying when they are trying to save money. This is especially true for price conscious families that have kids. They may make their kids wear an old pair of shoes for couple extra months and/or may choose to switch to a cheaper brand name. This decrease in demand for shoes has negative repercussions for K-Swiss' bottom on line. In 2009, net sales fell 25%.